The way forward with Trump

The Trump presidency in the United States could be good or bad for us depending upon the policies we adopt. Trump signals a retreat from globalisation. He intends to impose higher import duties on goods entering the US so that companies manufacture these in America leading to the creation of jobs. Specifically he has warned automakers to shift their manufacturing facilities from Mexico back to the US.

The increase in import duties means that US will import less from across the world, including India. Consequently, our exports such as of carpets and drugs will come under pressure. The impact of this on our economy need not be negative, however, if responded to correctly. We need to erect protectionist barriers around us just as Trump proposes to build around the US.

We will be in trouble if we continue to embrace the mantra of free trade espoused by the WTO, IMF and World Bank and maintain low import duties as at present. In that case imports into India will increase because we will continue to impose low import duties as at present; while our exports will suffer because the US will impose high import duties. It is like Trump building a wall in front of the American goalpost in a football match with India.

We will certainly lose if we do not erect a wall in front of our goalpost. We too must build the wall to counter the US. In other words, we too must increase import duties and erect a protectionist barrier around us. Otherwise our industries will be doubly hit. Cheap imports will come in because we have continued to follow the policy of open borders while our exports will be hit because the opposite parties have erected protectionist barriers.

The impact of Trump will nevertheless become beneficial if we too impose high import duties on goods coming from the US, China and other countries. In that case our industries will get free play in the domestic market unhindered by cheap imports. The loss from exports to the US will be made up by reduced imports from China and increased sales in the domestic economy. Of course, this would mean that our people will be deprived of cheap Chinese goods and will have to buy expensive domestic goods.

The way to deal with this problem is to institute an aggressive competition policy and provide assistance to domestic industries to access frontier technologies and upgrade their products to the best international standards. We failed to implement such a competition policy previously. The three cars made in India in the seventies were Ambassador, Fiat and Standard. All three were fuel inefficient and far behind the technological developments in other countries such as automatic thermostat for the radiator.

Tatas had sought license to produce passenger cars at that time. The government denied the permission. Instead of heating up the competition, the government gave protection to the inefficient carmakers. The policy was changed only when Sanjay Gandhi stepped in to make the Maruti. The carmakers would have upgraded technologically had competition from the Tatas been encouraged. Similarly, we will be able to force the domestic industries to upgrade technologically if we implement an aggressive competition policy.

The second change made by Trump is that he wants American multinationals to invest in America instead of in foreign countries. We will be deprived of foreign investments which has become the mainstay of our share markets in the last two decades. The hard truth, however, is that more capital has gone out from India to the developed countries in the last two decades than has come into India.

Outward flow of our capital is taking place though outward FDI, hawala transactions, under-invoicing of exports and for accretion of our foreign exchange reserves. The disclosures in the Panama papers indicate the large amounts of these illegal outflows. These are only the tip of the iceberg. The impact of Trump’s policy on our economy will depend upon the response made by us.

The impact will become positive if we prevent outflow of our capital. In that case, the reduction of capital inflows will be more than made up by increased retention of our domestic capital. Prime Minister Modi has lamented that Indian businessmen are more eager to invest abroad rather than in India. We must make the economic environment positive for the domestic businessmen.

Instead of targeting ‘Make in India’ towards multinational corporations, we must target it towards domestic businesses. The turn of domestic capital inwards will more than make up for the loss of FDI. There will be additional benefit from the reduction in the outflow of monies in the form of royalties and profit repatriations.

The third change made by Trump is to restrict immigration into the US so that more jobs are obtained by American workers. The impact of this on our economy will again depend upon the policy adopted by us. It is widely acknowledged that Indian engineers are the backbone of innovations made by US multinational companies like Microsoft.

Even US government organisations like National Aeronautics and Space Administration that sends missions to the moon are heavily manned by Indian professionals. Our professionals migrate to the US and undertake research there successfully because the domestic institutions are infected with corruption and nepotism. Our universities have become dens of political appointees.

The bureaucracy treats businessmen as cheats. Indian professionals can develop new technologies in India if a supportive environment is provided here. Innumerable examples are available where restricted access to readymade technologies has led to the development of indigenous capacities like the cryogenic engine and supercomputer.

Even the soft drink Thumbs Up was developed when the government sent Coca Cola packing from the country. Therefore, instead of crying about the loss of income from less outmigration of our professionals, we must focus on providing supporting environment to them within the country.

Trump no longer sees the US as leader of the world. It seems Trump will take a harder line towards Pakistan and China and support India. Here lies the danger. By seeking to grow under the US umbrella would be like tying our boat to the sinking ship.

The task before us is to break loose of the American big brother and chart our own destiny. We must make a new global alliance by reviving organisations like the Non-Aligned Movement to checkmate Pakistan and China instead of relying on the dying America to do this for us. Author was formerly Professor of Economics at IIM Bengaluru
By Dr Bharat Jhunjhunwala